Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 321

Four things advisers can do to manage conflicts

Many financial advisers don’t think they have a conflict of interest, but they might be wrong.

Thanks to the Royal Commission, everybody is talking about vertical integration and in-house conflicts. We explain what this means and highlight four things advisers can do to manage conflicts effectively.

I’m a financial adviser. Am I conflicted?

Probably. Vertically integrated structures are common in the wealth management industry and it’s not just the big banks that use them.

Putting yourself in the position of a financial adviser:

  • Do you recommend financial products (including managed accounts) that are issued or operated by your licensee or corporate group?
  • Do you recommend financial products that will give you, your licensee or your corporate group some type of financial benefit?

If you answered yes to either of these questions, congratulations! You’re conflicted.

So, is my business doomed?

No. Commissioner Hayne toyed with the idea of separating product and advice – known as ‘structural separation’ – but in the end he rejected the idea.

But don’t celebrate just yet.

While Hayne decided that it should be possible for advisers and licensees to manage in-house conflicts effectively, he was damning of the poor consumer outcomes caused by in-house conflicts in recent years.

We expect ASIC to scrutinise vertically integrated structures and in-house product recommendations this year. So advisers and licensees need to be able to demonstrate that they understand the conflict and can manage it effectively.

How do I do that?

You have to place your client’s interests above your own. In most cases, your client will have an existing product. So you should:

  • Perform a comparative analysis of the pros, cons, fees, risks and benefits of their existing product vs your in-house product, and
  • Explain why your in-house product is better for your client than their existing product. It’s not enough to just tell the client you have a conflict.

In-house product recommendations will generally be inappropriate if:

  • The benefits of the in-house product are lower, or
  • The costs of the in-house product are higher.

The exception to this is if there is a clear justification for your recommendation. For example, if your in-house product addresses a specific client need or objective that the existing product doesn’t.

If you can’t easily explain why you’re recommending your in-house product, don’t do it.

Is that all?

No. You have to record all of this on the client file and explain it in the Statement of Advice. Most advisers don’t do this adequately.

If your advice is not properly documented and explained, you are effectively guilty until proven innocent.

So, what should I do?

You can demonstrate that you are managing your in-house conflicts by doing these four things:

  1. Properly research your client’s existing product
  2. Link each recommendation to your client’s needs and objectives
  3. Explain why your in-house product is better for your client than their existing product, and
  4. Record all of these things on the client file.

What should I do next?

Review your advice procedures and conduct a gap analysis. If you have any questions or concerns, get in touch.

 

Simon Carrodus is a Solicitor Director at The Fold Legal. This article is general information and does not consider the circumstances of any individual or business.

 

7 Comments
DavidV
November 07, 2019

Well said and explained..pity you were not interviewed by the hayne comm

DavidV
November 06, 2019

Well said and explained..pity you were not interviewed by the hayne comm

Wayne
August 29, 2019

Hayne's recommendations have only entrenched power in the large institutions.
He was extremely quiet and essentially avoided the matter of intra fund advice and the conflicts within the industry fund network.
We’ll look back on this period as a witch hunt that destroyed a valuable service.
People will be forced back to the large institutions or avoid advice simply because of the cost. Excessive government regulation has a history of disastrous outcomes.

Chris DiMattina
August 28, 2019

The new FASEA Code of Ethics is very strong and definitive about conflicts of interest - you cannot have them, full stop! If there is a conflict you are not to act for the client. No more managing a conflict by disclosing and obtaining client consent. Hopefully there is further guidance on this because as it sits it appears practically unworkable.

SMSF Trustee
August 29, 2019

As an intelligent client, I am perfectly capable of telling when my planner is advising something with a potential conflict and making my decision.
An example. I use AMP's Ascend administration platform. My advisor when I made the decision was an AMP licensee. He showed me a range of options for this service, but Ascend was head and shoulders the best. I could easily have looked even more broadly, but I ended up with a service that does all my auditing, tax returns and other legal work (eg turning my little notes for file into formal Trustee meeting minutes) for a very, very reasonable fee. I get an online capability to approve things, change things and control payments into and out of the fund.
Yes, he had a conflict of interest. But he declared it and we managed it.
How the heck would it have been in my best interests if he'd been forced NOT to recommend the best option for me just because he happened to be employed by them? Give me a break!

Simon
September 02, 2019

The Explanatory Statement softens Standard 3 somewhat.

It states that an adviser "will not breach Standard 3 merely because you recommend to a client financial
products offered by your employer or principal. However, you will breach Standard 3
if a variable component of your remuneration depends on the amount or volume you
recommend of those products..."

I agree that this is not entirely helpful. It places us back in the world of grey to which we have become accustomed.

Frank
August 28, 2019

Just because investment management is outsourced, doesn't make it better. There are plenty of 'external' fund managers struggling and even closing, so why was choosing them in the client's best interests?

 

Leave a Comment:

RELATED ARTICLES

Three financial advice changes nobody is talking about

Five charts show predicaments facing financial advice

Westpac case and the digital fix for SOA mess

banner

Most viewed in recent weeks

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

Tariffs are a smokescreen to Trump's real endgame

Behind market volatility and tariff threats lies a deeper strategy. Trump’s real goal isn’t trade reform but managing America's massive debts, preserving bond market confidence, and preparing for potential QE.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Getting rich vs staying rich

Strategies to get rich versus stay rich are markedly different. Here is a look at the five main ways to get rich, including through work, business, investing and luck, as well as those that preserve wealth.

Latest Updates

SMSF strategies

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Superannuation

The huge cost of super tax concessions

The current net annual cost of superannuation tax subsidies is around $40 billion, growing to more than $110 billion by 2060. These subsidies have always been bad policy, representing a waste of taxpayers' money.

Planning

How to avoid inheritance fights

Inspired by the papal conclave, this explores how families can avoid post-death drama through honest conversations, better planning, and trial runs - so there are no surprises when it really matters.

Superannuation

Super contribution splitting

Super contribution splitting allows couples to divide before-tax contributions to super between spouses, maximizing savings. It’s not for everyone, but in the right circumstances, it can be a smart strategy worth exploring.

Economy

Trump vs Powell: Who will blink first?

The US economy faces an unprecedented clash in leadership styles, but the President and Fed Chair could both take a lesson from the other. Not least because the fiscal and monetary authorities need to work together.

Gold

Credit cuts, rising risks, and the case for gold

Shares trade at steep valuations despite higher risks of a recession. Amid doubts that a 60/40 portfolio can still provide enough protection through times of market stress, gold's record shines bright.

Investment strategies

Buffett acolyte warns passive investors of mediocre future returns

While Chris Bloomstan doesn't have the track record of his hero, it's impressive nonetheless. And he's recently warned that today has uncanny resemblances to the 1990s tech bubble and US returns are likely to be disappointing.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.